Investment risk: How Bitcoin turns early investors into millionaires
THE meteoric rise of the crypto-currency Bitcoin may have caught the eye of ordinary savers looking for a better return.
The meteoric rise of the crypto-currency Bitcoin may have caught the eye of ordinary savers
Some will have heard how Bitcoin turned early investors into millionaires, as the price soared from a few US cents to thousands of dollars.
It is up more than 500 per cent in a year and is now worth three times as much as gold.
However, experts warn it is tricky to buy and volatile, so you need to understand what you are getting into.
BITS AND PIECES
Bitcoin is a virtual, paperless currency that exists only on computers.
It was created by anonymous programmers in 2009 and is not backed by any government or regulatory authority.
The currency has a finite supply of 21 million, of which more than 16.5million are in circulation.
Central bankers cannot destroy its value by printing more of it, as they can with paper money.
It first came to public attention after being used for drug transactions on the dark web and was also used by hackers in the recent WannaCry ransomware attack on the NHS. Investors have lost money when online Bitcoin exchanges have been raided by cyber criminals.
However, it is slowly entering the mainstream, as fund managers invest in it and companies accept it as a form of payment. For many, the biggest attraction is as a speculative investment, with the currency being the best performer in 2015 and 2016 and is likely to repeat the feat this year.
A year ago, Bitcoin traded at $580 (£443 then), but this week the price topped $3,787, a rise of 550 per cent.
COINING IT IN
Damien Fahy, founder of MoneyToTheMasses.com personal finance advisors, warns Bitcoin has seen wild price swings.
“It is only for sophisticated investors who can speculate with money they are willing to lose,” he said.
“The price has fallen by as much as 20 per cent in a day. It would take an unprecedented event for that to happen to a traditional currency.”
It is unregulated and there is no compensation if the price collapses or hackers attack your exchange and you lose your coins, Fahy adds.
However, as a decentralised currency it is less vulnerable to collapse and also offers an alternative asset class.
He adds: “Its price may go higher or it could end in tears.”
Bitcoin is a virtual, paperless currency that exists only on computers
TRACKING UP
Investing directly is not easy, as you have to set up an online “wallet” to store your coins, then buy from an online exchange.
However, financial adviser Hargreaves Lansdown now offers a fund called the XBT Provider AB Bitcoin Tracker One, which made almost 50 times the 11.5 per cent return on a FTSE 100 tracker over the last year.
Fahy warns that the fund only loosely tracks the Bitcoin price and is denominated in Swedish krona, where XBT is based: “This means you are exposed to Bitcoin volatility and currency moves between the krona and the US dollar.”
The Bitcoin Investment Trust is another fund option, but its complex structure adds a layer of volatility.
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IN THE ETHER
Sophisticated traders can now trade Bitcoin through online platforms such as Ayondo Markets and IG.
Rupert Osborne, deputy head of foreign exchange and futures at IG, says it also offers trading in a rival crypto-currency called Ethereum: “Traders can take a view on whether Bitcoin or Ethereum will rise or fall without the risks associated with buying and storing it.”
Ayondo chief trader Jordan Hiscott says Bitcoin is now a mainstream asset, but he warned: “It reminds me of the technology bubble and could end the same way.”